TNAG-1604-FCO40-2211-Future-of-Hong-Kong-annual-reports-to-Parliament-on-Hong-Kon-1988 — Page 31

(a)

RESTRICTED

Stock and Futures Markets

34.

Following the crash in world stock markets, share prices fell

sharply in Hong Kong on 19 October 1987. The stock exchange of Hong

Kong decided on 20 October to suspend trading for four days in order

to enable all outstanding transactions to be settled in accordance

with the trading rules of the Exchange. The Hang Seng Index

futures market was also closed for the same period. The sharp fall

in the Hang Seng Index, the most widely quoted barometer of Hong

Kong Stock prices, raised serious doubts as to whether the Hong Kong

Futures Guarantee Corporation, which guarantees payment on all

contracts executed on the Hong Kong Futures Exchange, would be able

to meet its obligations. If the Guarantee Corporation were to have

collapsed, the Hong Kong Futures Exchange would not have been able

to operate or re-open. This could well have had serious knock-on effects on the stock market, the exchange value of the Hong Kong

dollar, the overall economy, and Hong Kong's credibility as an

international financial centre. To prevent such a situation from

arising, the Hong Kong Government decided to put together a rescue

package to enable the Guarantee Corporation to meet its

obligations.

35. The main element of the initial package was a credit facility

of HK$ 2 billion to the Guarantee Corporation, of which $ 1 billion

was provided by the Hong Kong Government from the Exchange

Fund and the remainder by the shareholders of the Guarantee

Corporation, a number of brokers and members of the Futures

Exchange. An additional facility of HK$ 2 billion (HK$ 1 billion

from the Exchange Fund and HK$ 1 billion from the Hong Kong and

Shanghai Bank, the Standard Chartered Bank and the Bank of China)

later extended to the Guarantee Corporation. These credit

facilities are loans repayable with interest at market rates. The

support operation helped the financial system of Hong Kong to remain

intact and the stock and futures markets to return to orderly

trading.

36.

In the light of these events in the stock and futures

markets, and in recognition of the need to maintain Hong Kong as a major international financial centre, the Hong Kong Government set

RESTRICTED